Hong Kong seeks to cash in on frenzy for Chinese biotech

[BEIJING] Chinese drug companies have been on a tear in the US stock market. Now, entrepreneurs and investors betting on the Asian country's fledgling biotechnology industry see another reason for optimism.

The stock exchange in Hong Kong - home to the world's fourth-largest equity market - is in the midst of weighing a proposal that would allow biotech companies to list even before they turn a profit. If those plans go through, it would pave the way for more Chinese health-care firms to raise money via initial public offerings, giving them easier access to funds for research.

Annual spending on prescription medicines has crossed US$100 billion in China as the incidences of diseases like diabetes and cancer have surged. The Asian country has lagged behind the US and other developed markets on innovation, and Beijing has said it wants to build homegrown champions in the health-care industry.

The proposed Hong Kong listing rules would provide a boost to those plans, while helping the exchange list more of China's so-called new-economy companies that are particularly attractive to international investors.

Without access to the Hong Kong market, such pre-profit companies "will likely go to America, but now Hong Kong comes in with its advantages in geography and language," said Lu Xianping, founder of Chipscreen Biosciences Ltd, a Shenzhen-based drug developer.

Chipscreen is preparing for an IPO and weighing options including mainland China and Hong Kong, according to Lu, whose company has one cancer drug on the market in China and is developing other oncology and diabetes therapies.

Hong Kong Exchanges & Clearing Ltd famously missed the opportunity to list Alibaba Group Holding Ltd, with the Chinese e-commerce giant choosing to list in the US where its weighted voting structure was allowed.

The biotech proposal comes as a string of Chinese companies working on innovative drugs are seeking IPOs. The Hong Kong exchange aims to finalise the new rules and begin taking applications around June, and plans to add people with biotech expertise to its listing division, chief executive officer Charles Li told media on Jan 24.

China's drug innovation has gained momentum in recent years, in part due to dramatic regulatory reforms to speed up approvals. The surge in Chinese biotech stocks shows growing appreciation for Chinese R&D, and the opportunity among US investors, said Debra Yu, head of US cross-border healthcare investment banking for China Renaissance, a Chinese boutique investment bank.

Three Nasdaq-listed pioneers have surged over the past year: Hutchison China MediTech Ltd has jumped about 172 per cent as of Jan 25 in the US, BeiGene Ltd. has gained 246 per cent and Zai Lab Ltd has risen more than 35 per cent since its September IPO.  Other companies have also benefited from the general optimism. Wuxi Biologics Cayman Inc, a profitable Shanghai-based service contractor that helps its clients develop and manufacture biotech drugs, has seen its share price surge more than 165 per cent after a Hong Kong listing in June.

It can take up to 10 years to fully develop a new drug, and success can be elusive even in the later stages. Only a tiny fraction of experimental medicines ever make it to the market. In the US, the Nasdaq Biotechnology index has seen sharp swings and the stocks of small biotech companies are often hammered over bad news from clinical trials.

For instance, Axovant Sciences Ltd lost 74 per cent of its market value in a day in September after a main pipeline drug failed a crucial clinical trial. By contrast, Seattle-based Juno Therapeutics Inc surged earlier this month after Celgene Corp announced it would buy the biotech firm.

Asia's biotechnology industry is still developing, and analysts and investors in the region have less experience in analysing early-stage drug firms. Historically, the Hong Kong market pays a lot of attention to earnings and market size, and lacks a track record of evaluating firms before they start recording earnings, said Jonathan Wang, co-founder at the Asia fund of OrbiMed Advisors LLC.

Meanwhile, some already warn of the risk from the flood of venture capital rushing into early-stage Chinese biotechs. "The domestic pharmaceutical investment is also booming so much there's some bubble," said Mr Lu of Chipscreen, referring to valuations of unlisted firms. "But it is still pushing the industry forward."

Hua Medicine Ltd, a Shanghai-based developer of mainly diabetes drugs, recently hired George Lin, former head of Asia consumer, retail and health-care investment banking at Bank of America Corp. The company is evaluating options including a Hong Kong or US IPO, Chen Li, its co-founder and chief executive officer, said in a phone interview.

Investors in Hong Kong have a better understanding of China's regulatory and market situations, which are key to evaluating a drug developer, said Chen. Stock links with Shanghai and Shenzhen will allow mainland investors to buy the shares of Chinese biotech companies in Hong Kong much more easily than on the Nasdaq, he added.

While it can take time for Hong Kong to build the expertise, its links to mainland China could help outweigh the shortcomings. "A lot of Chinese companies feel a lot closer to Hong Kong. They can travel to Hong Kong, and talk to investors there, who often can speak Chinese. It's a good thing for them," said Wang at OrbiMed.

BLOOMBERG